RISK ASSESSMENT FOR CONSTRUCTION JOINT VENTURES IN CHINA By L. Y Shen, George w.C. Wu, and Catherine S K.N ABSTRACT: The construction industry in China is developing toward the international procurement practice. and such development has attracted many foreign firms into the Chinese construction market through the for- mation of Sino-foreign joint ventures. Joint venture has become an important sector in the Chinese construction industry. However, the difference in management systems, technological practice, and cultural background among the partners within joint ventures brings difficulties to the function of joint venture. A significant degree of risk is involved in joint venture investments. Thus, foreign firms increasingly intend to spend more effort in studying proper strategies of managing risks in their joint venture businesses. Based on a survey, this paper establishes a risk significance index to show the relative significance among the risks associated with the joint ventures in the Chinese construction procurement practice. Real cases are examined to show the risk environment faced by joint ventures. The paper also investigates practical applications of risk management in the business of joint ventures INTRODUCTION A significant needed is expected from overseas in Since the implementation of"ope door"policy in China of these overseas investment work xpected in the early 1980s, a significant number of foreign construction mented through joint ventures(Nian 1999) nvestors and contractors have entered into the Chinese con Nevertheless, the development of Sino-foreign joint ven- struction industry through the formation of joint ventures with tures in the Chinese construction market has attracted foreig local firms. While China is cautiously opening its construction partners'attention to risk management. In the environment market to overseas, the report from the Ministry of Construc- where the market mechanism for protecting joint ventures tion(MOC)shows that the number of foreign contractor still being established, joint ventures present themselves to have obtained the business certificate from the chinese many uncertainties which can bring significant risks. In a typ- ernment has rapidly increased. There was none at the ning of 1990s, by the end of 1996 there were 118, by the responsible for providing the majority of financing, and the local partner provides facilities, land, and labor. Thus, overseas struction joint ventures has grown from 1, 200 in 1994,to party is usually in a more risky position, as they cannot easily 1,600 in 1995, and over 2000 by the end of 1996(MOC 1997, take with them the assets invested if they do not wish to con- 1998). This development is in line with the reform programs tinue or want to withdraw from cooperation. While a good of the Chinese construction industry, which aim for changing deal of the literature has presented the general business the project financing arrangement from traditionally govern- ronment for joint ventures in China, there are few works fo- mental free allocation to commercial loan and changing the cusing on the construction market. In the late 1980s, Walker project procurement system from governmental assignment to and Flanagan(1987)provided one of few typical works in competitive tendering. The application of competitive pro- vestigating the Chinese construction environment for joint curement has brought rapid development of other nonstate ventures. Flanagan and Li(1997)examined business condi- tive-owned firms, private firms, and Sino-foreign joint ven- al 's works present the procedures for foreign firms to enter tures. MOCs recent statistical report shows that, in 1998, the to the Chinese construction market(Shen and Fan 1994 total number of construction firms registered in the four-grade Shen and Lee 1998). It appears that little research has been rading system was 41, 114, employing 19, 427, 428 working conducted to investigate the risks associated with Sino-foreign staff. Still many small construction teams from rural areas joint ventures in Chinese construction. Thus, it is the main were not included in the grading system. These graded organ- izations include 8, 702 state-owned firms employing 6, 411, 423 relative significance. The paper establishes a risk significance working staff, 28, 304 collective-owned firms employing index, from which the most significant risks are highlighted 1, 231, 744 workers, 4, 108 other ownership employin The data used are from a recent survey Analysis is conducted 1, 784, 261 workers(MOC 1999). Other ownership mainly con through discussing real examples. By presenting the facts of sists of Sino-foreign joint ventures, shareholding firms, and risks, the paper presents references to overseas construction private firms. Sino-foreign joint ventures will continue to gro professionals who are working or planning to enter the Chi and play tant roles in the Chinese construction. In a cent development, the government has considered housing and nfrastructure as two main sectors in the Chinese economy CONDUCT OF SURVEY The research team conducted a survey from August 1998 to ssoC. Prof, Build and Real Estate Dept, Hong Kong Polytechnic February 1999. The survey, distributed to 185 professionals . Kowloon, Hong Kong. received 54 effective replies from firms based in Hong Kong or mainland China. The correspondents were from consultants, Sr Contracts Mgr., Henderson China Ltd, 5/F, Harcourt House, 39 designers, and project managers. They had good experience loucester Rd, Hong Kong working on behalf of a foreign partner in various joint ventures month, a written request must be filed with the ASCE Ma in major cities in China including Beijing, Shan zhou, Chongqing, and Shenzhen. The majority of the Journals. The manuscript for th s submitted for ossible publication on April 13, 1998. This paper is part of the Journal dents were working in leading construction and real of Construction Engineering and Management, Vol. 127, No. 1, J firms such as Henderson( China) Investment Co., St ire prop- J-y/February, 2001. OASCE, ISSN 0733-9634/01/0001-0076-0081 erties, New World Development( China)Ltd, Hongkong Land 00+ $.50 per page. Paper No. 18094 Ltd, China State Construction Engineering Co(Hong Kong) 76/ JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT JANUARY/FEBRUARY 200176 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / JANUARY/FEBRUARY 2001 RISK ASSESSMENT FOR CONSTRUCTION JOINT VENTURES IN CHINA By L. Y. Shen,1 George W. C. Wu,2 and Catherine S. K. Ng3 ABSTRACT: The construction industry in China is developing toward the international procurement practice, and such development has attracted many foreign firms into the Chinese construction market through the for￾mation of Sino-foreign joint ventures. Joint venture has become an important sector in the Chinese construction industry. However, the difference in management systems, technological practice, and cultural background among the partners within joint ventures brings difficulties to the function of joint venture. A significant degree of risk is involved in joint venture investments. Thus, foreign firms increasingly intend to spend more effort in studying proper strategies of managing risks in their joint venture businesses. Based on a survey, this paper establishes a risk significance index to show the relative significance among the risks associated with the joint ventures in the Chinese construction procurement practice. Real cases are examined to show the risk environment faced by joint ventures. The paper also investigates practical applications of risk management in the business of joint ventures. INTRODUCTION Since the implementation of ‘‘open door’’ policy in China in the early 1980s, a significant number of foreign construction investors and contractors have entered into the Chinese con￾struction industry through the formation of joint ventures with local firms. While China is cautiously opening its construction market to overseas, the report from the Ministry of Construc￾tion (MOC) shows that the number of foreign contractors who have obtained the business certificate from the Chinese gov￾ernment has rapidly increased. There was none at the begin￾ning of 1990s; by the end of 1996 there were 118, by the middle of 1997 and there were 139. The Sino-foreign con￾struction joint ventures has grown from 1,200 in 1994, to 1,600 in 1995, and over 2000 by the end of 1996 (MOC 1997, 1998). This development is in line with the reform programs of the Chinese construction industry, which aim for changing the project financing arrangement from traditionally govern￾mental free allocation to commercial loan and changing the project procurement system from governmental assignment to competitive tendering. The application of competitive pro￾curement has brought rapid development of other nonstate owned construction sectors in the industry, including collec￾tive-owned firms, private firms, and Sino-foreign joint ven￾tures. MOCs recent statistical report shows that, in 1998, the total number of construction firms registered in the four-grade grading system was 41,114, employing 19,427,428 working staff. Still many small construction teams from rural areas were not included in the grading system. These graded organ￾izations include 8,702 state-owned firms employing 6,411,423 working staff, 28,304 collective-owned firms employing 11,231,744 workers, 4,108 other ownership employing 1,784,261 workers (MOC 1999). Other ownership mainly con￾sists of Sino-foreign joint ventures, shareholding firms, and private firms. Sino-foreign joint ventures will continue to grow and play important roles in the Chinese construction. In a re￾cent development, the government has considered housing and infrastructure as two main sectors in the Chinese economy in 1 Assoc. Prof., Build. and Real Estate Dept., Hong Kong Polytechnic Univ., Kowloon, Hong Kong. 2 Executive Dir., Henderson China Ltd., 5/F., Harcourt House, 39 Gloucester Rd., Hong Kong. 3 Sr. Contracts Mgr., Henderson China Ltd., 5/F., Harcourt House, 39 Gloucester Rd., Hong Kong. Note. Discussion open until July 1, 2001. To extend the closing date one month, a written request must be filed with the ASCE Manager of Journals. The manuscript for this paper was submitted for review and possible publication on April 13, 1998. This paper is part of the Journal of Construction Engineering and Management, Vol. 127, No. 1, Janu￾ary/February, 2001. qASCE, ISSN 0733-9634/01/0001-0076–0081/ $8.00 1 $.50 per page. Paper No. 18094. the coming years. A significant proportion of the capital needed is expected from overseas investment, and the majority of these overseas investment works are expected to be imple￾mented through joint ventures (Nian 1999). Nevertheless, the development of Sino-foreign joint ven￾tures in the Chinese construction market has attracted foreign partners’ attention to risk management. In the environment where the market mechanism for protecting joint ventures is still being established, joint ventures present themselves to many uncertainties which can bring significant risks. In a typ￾ical Sino-foreign joint venture, the overseas party is usually responsible for providing the majority of financing, and the local partner provides facilities, land, and labor. Thus, overseas party is usually in a more risky position, as they cannot easily take with them the assets invested if they do not wish to con￾tinue or want to withdraw from cooperation. While a good deal of the literature has presented the general business envi￾ronment for joint ventures in China, there are few works fo￾cusing on the construction market. In the late 1980s, Walker and Flanagan (1987) provided one of few typical works in￾vestigating the Chinese construction environment for joint ventures. Flanagan and Li (1997) examined business condi￾tions for overseas construction professionals in China. Shen et al.’s works present the procedures for foreign firms to enter into the Chinese construction market (Shen and Fan 1994; Shen and Lee 1998). It appears that little research has been conducted to investigate the risks associated with Sino-foreign joint ventures in Chinese construction. Thus, it is the main purpose of this paper to identify these risks and examine their relative significance. The paper establishes a risk significance index, from which the most significant risks are highlighted. The data used are from a recent survey. Analysis is conducted through discussing real examples. By presenting the facts of risks, the paper presents references to overseas construction professionals who are working or planning to enter the Chi￾nese construction market. CONDUCT OF SURVEY The research team conducted a survey from August 1998 to February 1999. The survey, distributed to 185 professionals, received 54 effective replies from firms based in Hong Kong or mainland China. The correspondents were from consultants, designers, and project managers. They had good experience working on behalf of a foreign partner in various joint ventures in major cities in China including Beijing, Shanghai, Guang￾zhou, Chongqing, and Shenzhen. The majority of the respon￾dents were working in leading construction and real estate firms such as Henderson (China) Investment Co., Swire Prop￾erties, New World Development (China) Ltd., Hongkong Land Ltd., China State Construction Engineering Co. (Hong Kong)